Ballot measure money not political under IRS loophole

It's considered the equalizer for the most-talked about organizations in politics: an IRS requirement that 501(c)(4) 'social welfare' groups spent less than half their cash on politics.

But experts say the IRS left a big loophole that could play out big time in California: ballot measure spending isn't considered political.

"You could have a nonprofit doing virtually no traditional charitable work at all and really just being a funnel for campaign funds," says Gary Winuk, the chief enforcement officer of the state's Fair Political Practices Commission.

The existence of the loophole is understandable; few states have an initiative system that allows voters to write their own laws. And even fewer have a system that's used as often, and costs as much, as the one in California.

Even so, it's a loophole not widely publicized and likely to gain more attention as 501(c)(4) groups turn more of their attention -- and money -- to the Golden State.

But "political campaign activities" is not explicitly defined. In fact, as IRS advice documents (PDF) make clear, the agency simply assumes it means "a political campaign on behalf or in opposition to a candidate."

"It doesn't count ballot measures expenditures, advocacy for or against as part of campaign activities," says FPPC's Winuk.

And that, he says, means that a 501(c)(4) nonprofit could essentially spend all of its money on politics, by counting its ballot measure contributions on the side of the ledger that's supposed to be reserved for civic educational efforts.

"That's one of those loophole that they're definitely taking advantage of," says Phillip Ung of Common Cause California, an organization that advocates for changes in campaign finance laws.

"I think we saw," says the FPPC's Gary Winuk of that case, "it's a conscious choice of trying to balance out" ballot measure and candidate spending. "I just think we need to take a fresh look at whether the nonprofit law is working the way it's designed to."

That, of course, would require action on Capitol Hill -- an unlikely scenario, especially with congressional elections looming in 2014.

Instead, watchers suggest the only avenue would be more disclosure of who's giving those dollars -- something state lawmakers can do, even if the 501(c)(4) is based outside of California. A bill to do that failed to make it to Gov. Jerry Brown's desk in 2013, but remains pending for legislators to consider when they return in January.